The Ongoing Chinese Annexation Of The US Consumer

Recent conversations over the symbiotic relationship between China and the US all end up focusing on three key concepts:

The lopsided trade balance (China exporting and the US importing)

China's willingness to continue investing in US assets even with a declining dollar, a debt load which will likely one day result in a payment moratorium (the banana republic syndrome) and collapsing economic drivers

Who can inflate yet another fiat bubble faster (opinions are split here, although China is conclusively in the lead for the time being) and deflate respective massive debt burdens

There is much more, but ultimately these three are what it all boils down to. And, continuing the simplified reduction, the key driver of all these three really has to do with consumption, which is not only what drives the US economy (70%+) but has been the driver for global growth over the past several decades.

The irony is that the US consumer is now essentially a vassal state of China's production complex, and all the unbalanced trade and credit flows do, is provide the funding to stimulate the US consumer to purchase even more Chinese products. A side-by-side compare and contrast of the two consumer classes demonstrates why the "IRR" on Chinese investment in the US will always be much higher than any concerns of debt repudiation or outright bankruptcy.

The chart above says it all.

The fate of China, for lack of its own middle class, is intimately tied with the ever increasing discretionary purchasing capacity of US consumers: the discretionary differential is staggering: a 35x multiple! And instead of fostering the growth of its own middle class, a long, tedious and expense process for what is essentially an overpopulated communist country, a much easier detour to feed its excess production capacity is merely to keep purchasing the securities that will fund the US consumer's purchasing and maxing out of assorted credit cards until such time as every single bathroom and shoe closet boasts at least 3 plasma TVs.

The implications are interesting - the US realizes that it has not only a loaded gun to the temple of China's US debt funding complex, but that every single chamber is loaded.

What are China's alternatives? An internally sourced credit bubble which will be a one-time boost to spur consumption by Chinese citizens has already fizzled, with the ironic outcome of instead purchasing refrigerators, the Chinese took all the cheap money and invested it in the stock market. Alas, the marginal utility to the overall Chinese economy from this gambling bonanza is nil, as very few Chinese companies have used the run up in the Hang Seng and the Shanghai Composite to lower their cost of capital. The last is an evil Catch 22 of market bubbles - nobody will buy equity offerings from companies, which every sophisticated investor realizes are so expensive only as a function of overeager retail spirits (let's see AIG try to price a follow on at $50/share - we dare Goldman to pitch that idea to Benmosche). And bubbles tend to pop. But in the meantime the excess liquidity will spur a one-time pick up in the purchase of all dollar-denominated goods (read great Dell and Intel results), with the trendline promptly reverting back to normal.

So the conclusion is that it always has and always will be about the US consumer. And any concerns that China may stop purchasing US securities are, unfortunately, groundless - China can ill afford to push the US middle class into a greater savings mode, and thus will cooperate as much as it can with the Federal Reserve in keeping both mortgages (for the illusory net wealth effect) and interest rates as low as possible for as long as it can. However, this being simply another fiat-funded bubble, and due to its Ponzi nature, a much more vicious one, the second this symbiosis ends for whatever unforeseen reason, the impact on China, and by implication on the US, will reverberate throughout monetary and fiscal policies and likely result in civil unrest both in the US and China, once Walmart can no longer provide cheap garbage to satisfy the American demand for constant credit-financed unneeded products, and once the China GDP illusion of minimum 8% growth is popped, resulting in an end to the Communist-Capitalist hybrid experiment.

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China will have to commit more and more of it's pile of existing $$ to the US as the growth of its stockpile is slowing greatly. In th end we sucker them in to committing all of the stock pile of $$ and then we say sorry...game...over....thanks...for....playing!

In the end low interest rate will not help.....you will need employment and income......china can't help there as it does not want to reduce it's 50% savings rate (or better yet it can't reduce it without rates moving dramatically higher at home killing the meager domestic consumer demand).

China knows the longer it waits, the worse the damage will be, so they might just pull the trigger at some point and take the hit. Their government is a lot better equipped to handle civil unrest than the US (and their government is smart enough to know bubbles can't be inflated forever, something I don't think is true of the US congress), so I think there is a real possibility that China will stop funding. The way I see it we are much more dependant on them than vice versa.

"As the United States rolls up record budget deficits, Asian countries are showing a reduced willingness to finance the debt. Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month."

Looks to me like the selloff has already begun, if this story is to be believed. China looks to be selling them off a little at a time so as not to flood the market right away and drive down the price, therefore deriving maximum value from their stash of this crappy paper until the REAL run on Treasuries begins. Makes sense, that's what I'd do.

Or am I missing something here, and if so, can someone explain to me what it is?

Buy gold and/or silver instead, on the dips, or dollar averaged. Look at the long term trends in money creation and the gold price to see why. Interest rates on dollar denominated savings accounts, especially after you pay taxes on the interest, do not keep up with inflation. Gold and silver are true savings vehicles.

Can China continue to fund our deficit even if they wanted to? China's economic activity is down because ours is down, so in theory they have less money to fund debt. At the same time the U.S. is running a record budget deficit this year, another $1+ trillion next year, and budget deficits for as far out as the government cares to project. It seems only Ben's monetization is saving this system.

"However, this being simply another fiat-funded bubble, and due to its Ponzi nature, a much more vicious one, the second this symbiosis ends for whatever unforeseen reason, the impact on China, and by implication on the US, will reverberate throughout monetary and fiscal policies and likely result in civil unrest both in the US and China..."

Along with others, I am tempted to call the one in progress "the last bubble". The previous one was built on lying (ratings), mostly hidden from common observation, and increased leverage using CDS (and my personal fav, "Interest Rate Swaps" which, as we all know, are "completely benign" as advocates claim their netting to be unity. Ha fucking ha.)

In contrast, this bubble is built on printed stuff being called "money", and on an absolute tidal wave of overt lies: accounting that isn't any such thing, zombie banks, more than $20 Trillion of spending and backstopping, stocks that levitate...all well documented here at ZH and elsewhere. Anyone grounded in reality finds this all to be very disorienting.

I broadly agree with this post but to view the world as China the producer and US the consumer is too simplistic. Chinas biggest trading partner is the Eurozone and the rest of the world still buys Chinese goods.

I think a pertinent question is would you buy A shares on 30x earnings when the US consumer is going off a cliff ?

The idea of the Chinese consumer leading the world out of recession is a nice one but the numbers just do not add up.....and culturally they wouldn't consume even if they could.

Why has the PBOC opened up the Chinese market for IPOs again ?? So the state entities shareholders can enrich themselves at the expense of the market. When the bubble bursts ..as it is now it will take a lot of wealth with it.

Are you kidding me? The Chinese that I know are huge consumers when they have money. Much more flashy and ostentatious than most westerners. They are simply required to save more as they do not have the security of the social safety net that Americans do. (That last statement even amazes me...America has more social welfare structure than a communist county)

Personally, I think the powers that be want to enable the consumptive power of the Asian market because I believe they will be more all consuming than the west, which still has vestiges of frugality/spartanism/Puritanism (insert others at will)

Are you kidding me? The Chinese that I know are huge consumers when they have money. Much more flashy and ostentatious than most westerners as "showing" status is hugely important to them culturally. They are simply required to save more as they do not have the security of the social safety net that Americans do. (That last statement even amazes me...America has more social welfare structure than a communist county)

Personally, I think the powers that be want to enable the consumptive power of the Asian market because I believe they will be more all consuming than the west, which still has vestiges of frugality/spartanism/Puritanism (insert others at will)

YOU MAY BE RIGHT BUT IN MY 20 OR SO TRIPS I HAVE SEEN LITTLE EVIDENCE OF IT. PROFLIGATE SPENDING IS NOT PART OF THE CULTURE AND FRANKLY , BECAUSE YOU KNOW SOME CHINESE PEOPLE THAT ARE FLASHY DOESN'T PARTICULARLY CHIME WITH 2000 YEARS OF BEHAVIOUR.

I am not a China Expert, but my understanding is that the social safety net in China is limited and that is a major reason for the high savings rate. I think it folly for us to think they will not gradually increase their standard of living and we have them by the short hairs.

I think China is done playing this game. Foreign asset flows have turned negative for the first time in decades. Our exports are rising and the trade deficit is shrinking. Shinking trade deficit means less USD being recycled.

America's domestic economy is not as important for global trade as we think. World is spinning [i]ok[/i] even when US banks go bust and US consumers don't buy anything. Demand for Chinese goods from within China, Japan, Brazil, Eurozone, Russia and ME is pretty strong.

There's a seismic shift happening and the repeated calling to dethrone the rotten USD as lead currency is warranted given the shift.

There is no one to shift the demand to. If you want to keep the current levels of production... the US is the market, otherwise things will need to shrink "seismically" which could be extremely disruptive to all economies.

The US consumer is the only game in town for the time being, and I don't see it changing anytime soon. Therefore, even though China hates to admit it, they are gonna have to keep funding us, unless they want World War III, which they don't because technologically and militarily they are woefully behind and rely on tired old Soviet books of strategem, which we know inside and out.

Culturally China has a lax social safety net which causes people to save up tons of money. No social security there, no free medical for everyone with a heartbeat, no unemployment benefits, and virtually no monetary assistance to rural areas. This all equates to a population that is woefully divided into two worlds - the poor countryside and the middle class city folk, supported by a vast underclass of migrant workers. Further, the government for all it's Sino-centric views, doesn't give a rat's ass about their own citizens, further prompting their citizens to save, just in case and for retirement.

The rest of SE Asia is a basketcase of military regimes, shaky government, and a complacent populace.

The Japanese are not huge spenders, as culturally they want to save money to support their elders, and most remember the horrid contraction of their economy in the late 1980s and the lost decade of the 90s, which can be revised to the lost TWO decades.

Culturally, Europe is more like the US in the 1950s. Save a percentage of your income for retirement. And last I checked, Europeans will consume American goods, but they won't adopt our culture beyond rap & hip-hop. Pile on top of that the HUGE aging problem and cost of living, combined with overcrowded nations (we forget that Europe has less landmass than the USA combined, but 2.5 times the population). Therefore, using the European citizen as a consumer is out of the question.

South Asia, namely India, is even worse off than China.

The Middle East is just a nuthouse for defunct governments who are too busy Israel and US bashing to try and prop up their economies to be less dependent on energy exports. Same for Africa, and to a lesser extent, South America.

The idea behind trade is that one party exchanges something of value to another party for something of equal value. The idea that China needs us to consume their products is ridiculous. Their is nothing inherently valuable in consuming the fruits of someone else's labor. The Chinese (and other creditor nations) are the ones doing the producing. Over the next few years they will realize that they are much better off consuming their own production rather than exchanging it for irredeemable IOUs.

Letting go of the idea that US consumption is the engine of world growth will no doubt cause some short-term problems for China, but they will be much better off in the long run.

Agree, they are constrained by us in the short term only, and are quickly breaking the ties.

The article has a good summary, but wrong conclusion. One observation that I know is wrong:

"China can ill afford to push the US middle class into a greater savings mode, and thus will cooperate as much as it can with the Federal Reserve in keeping both mortgages (for the illusory net wealth effect) and interest rates as low as possible for as long as it can."

All FCBs have abandoned the agency MBS market, because it does not offer full faith and credit backing of the credit risk. Without that, they will not be coming back. They do not want exposure to Fannie and Freddie without EXPLICIT government backing. It took them years to get comfortable buying even agency MBS, and will not start buying again with the mess the agencies are in.

As for USTs, it appears they are shortening their duration significantly. Wonder why.

"For to win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill. "

China has been robbing us of our technology, jobs, manufacturing capacity for decades abetted by currency manipulation and American greed in the form of offshoring profits. They eagerly send us the fruits of their labor in anticipation of being able to continue this annexation of the means of production.

Assuredly, their reserves of US dollars arising out of this process have 0 intrinsic value. However, the world does not perceive this fact and they will continue to covertly exchange their dollar holdings for real assets.

Once a sufficient monopoly on the means of production has been attained, they will cut off the US consumer.

Yeah to me it's been pretty obvs what's been going on but I tend more towards tinfoil than most. I'm sure our fearless corrupt leaders have cut all sorts of deals to keep the spigots open for a few more months.

China has not robbed us of anything.We gave it away with hardly a fight.

Production has been sent to China for one reason and one reason alone – it costs less.Walk through any major retailer and I guarantee 70% of the stuff you pick up was made in China.

Why would you believe that China would want to cut off the US consumer?What good is it to have the means of production when there is no one to buy the production?China doesn’t want the ridiculous and impractical products they make – these products are for the silly Americans.

Very well put. As you say, they have been doing this for decades, and will continue to change their USD into real assets. Check out the history of Minmetals, they have been acquiring plants and raw materials in the metals business for a while, and continue to acquire today.

On the contrary, I think we've been robbing them. They mfg'd and sent over tangible goods (i.e. childrens clothing) and in turn, we sent them back pieces of paper (or merely electronic entries representing pieces of paper) as an exchange. When China came in and wanted to exchange those pieces of paper for something tangible (think CNOOC trying to buy Union Oil) then we scream a blue streak. This is a batshit crazy relationship. Same thing happened to them in Australia.

I feel that the signals ending this are China's continuing efforts to acquire large amounts of gold and other commodities and that they've switched to very short-term treasuries and in much smaller quantity. There is evidence that strawman bids from China are really Fed agents making it look like 'foreign' purchases.

I do agree with your premise to not underestimate China. They have a much greater, patience, discipline and a much longer timeline and planning ingrained in their culture. I also think that they really want to continue to have a merchant relationship with the US, rather than attempting to take over (they know what a hassle that'd be). Right now it is the US which is acting like a gangster doing a "bust-out" of a usurped business.

Discretionary income per capita (percent of total income) 62% US 48% China - Wrong!

Discretionary income per capita (percent of income) is much HIGHER in China than it is in the US. The vast majority of these folks live in hugely subsidized housing and their companies and factories pay for at least one, usually two meals a day. Making car payments; nope, health care; paid for.

Even reversing these numbers doesn't bring it into balance......What else is incorrect with these statics provided by BAC, the CIA et al?

Good points but health care is not paid for- an emergency room visit can eat up a whole years salary. My question is, what sort of intellectual capital exists in China? Low-grade steel? The Japanese and Koreans are way ahead of them in steel. Shipbuilding? Ditto- their boats are crap. Solar? They put panels together, not sure they are the source of many advancements. If you made a discovery in China would you choose to develop it their or, perhaps, go to Singapore, Switzerland, or Silicon Valley? Construction? OK, they build excellent roads/bridged/tunnels/ports and commercial skyscrapers and apartment buildings (that nobody lives/works in). Oil? China Oilfield Services is a joke. Name one global Chinese company that cannot be replicated...

It is more likely than not that the fact you can post your comments on the zero is that you are using parts/products produced in China.

Take a look inside your gadgets.....memory, boards, chips, battery,

genius is found in every races at a ratio of 1 to 1 million. The higher the population, the higher the number of genius. It used to be US can attract genius from other regions. No longer the case. Overtime, China (india), with the highest population, will have advantage.

Not to mention China and India put their geniuses to work innovating and producing real products. We put our geniuses to work manipulating our fiat currency. Case in point was that dude from AIG who put his resignation letter in the NYTimes. Guy had an engineering degree from MIT, but found the greatest rewards in the swaps business.

I am not a US bull- I think the country is moving in exactly the wrong direction. But what made the US great was its social technology- property rights, legal system, oversight institutions which complemented the relativley low-tax free enterprise system. As far as I can tell China lacks any sort of social technology- they are assumed to be a top-down well-oiled machine who can manage the economy to success but they are not. They are a combination of overlapping bureaucracies with no respect for private property, liberty, intellectual property, and no legal system to speak of. Hardly an environment that fosters innovation. The benevolent dictatorship of Singapore and HK would be much more attractive destinations for innovation but, alas, they are merely city-states and thus financial centers. I find India to be a much more attractive story than China, although the excessive bureaucracy has to be curbed.

I am not a US bull- I think the country is moving in exactly the wrong direction. But what made the US great was its social technology- property rights, legal system, oversight institutions which complemented the relativley low-tax free enterprise system. As far as I can tell China lacks any sort of social technology- they are assumed to be a top-down well-oiled machine who can manage the economy to success but they are not. They are a combination of overlapping bureaucracies with no respect for private property, liberty, intellectual property, and no legal system to speak of. Hardly an environment that fosters innovation. The benevolent dictatorship of Singapore and HK would be much more attractive destinations for innovation but, alas, they are merely city-states and thus financial centers. I find India to be a much more attractive story than China, although the excessive bureaucracy has to be curbed.

"health care is not paid for- an emergency room visit can eat up a whole years salary". It certainly could here, but, I'm not sure under what scenario that would occure in China because health care is also massively subsidized.

My friend's (Chinese) father is undergoing months of chemo in Hangzhou. It's not coming out of his pocket. I had ten acupuncture treatments in a Chinese hospital and it set me back $2.40 (total).

As to what intellectual capital exists in China...well...not much at all. I'm not defending China (sadly, they will probably end up devouring us). I'm only pointing out that the stats offered above are flawed.....based on my 25 years of business experience in China

"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946," the report said.

US consumers are running out of bullets. The current consumption level is supported by homeowners who defaulted the mortgage payment, yet banks who own the mortgage dare not go through the foreclosure process in an attempt to avoiding mark to market (foreclosure without eviction, the new normal). Homeow(e)ners who default the mortgage payment are inclined to charge everything and anything on the credit cards with the intentionn of default. Hei, What harm will that do to the credit report, given the fact the homeowners already default on the mortgage.

You see, suddenly, defaulting mortgagees have plently of bullets to consume ( no mortgage payment, no credit payment). Life is wonderful, again until...

Don't forget the cash advance of $3,000 on your last CC (over the limit if possible) to cover the legal fees for the bankruptcy, then the lights out. Until the next subprime CC offers start magically reappearing in the mail box. Rinse and repeat...the path of least resistance.

Another excellent point. Figure the average loan balance is $200K (just to make the math simple), and the average interest rate is 6%, that is a payment of $1200 a month, just P&I, put taxes and insurance on that and you are talking at least $1300 a month. That is a huge savings for someone.

Put another way, DTI ratios are generally in the 30 - 40% range, though for some subprime loans that went higher - up to 55% and sometimes beyond.

Assume the housing ratio (housing payments / gross income) was 30%. That is 30% of gross income the consumer now has to spend that they didn't have.

Bottom line - "walking away" is dumb, just stop paying and stay in the property, it is highly lucrative.

Eventually, of course, that ends, but it can be highly stimulative to the consumer in the short run.

I would suggest that few people on this MB have ever been to China let alone successfully locked horns with the Chinese in a business environment. However, I have since the early '80's and I can state that the "business elite" in China is no threat, at all. The Party however, is a whole different story. They are smart and they are intent on neutralizing us.

China's mindset is so different from the west's you can't even begin to imagine, and unless you have lived there for any period of time your opinion on this statement doesn't matter a fig.

China doesn't need to depend on USA, but it currently does. And if USA stopped buying goods, it would take TIME to restructure the economy in China. That restructuring is often referred to as "recession" -- the bigger the restructuring, the bigger the recession, and then it'll be known as a 'depression', which is precisely what this article alludes to. No body wants to undergo this restructuring, so they keep trying to perpetuate a feel-good system they have in place now. It may feel good for the time being, but it's not sustainable, and sooner or later restructuring must occurr. Recessions are medicines to the problems, they are teh byproducts of the problems, yet most people (especially the ones in charge) think that the symptom is the problem.

That's like a doctor giving you Tylenol b/c you have a fever, instead of giving you anti-biotics b/c the fever you have is from a bacterial infection. Sure, the Tylenol will make you feel better, but meanwhile the bacteria will continue to make you more sick.

What's interesting is that China runs a trade deficit with the rest of the world, and its not just because they're buying commodities. China runs a trade deficit with the EU, which is supposed to be the backward cousin to the more advanced US economy yet is similar in that is a mature advanced economy with a high proportion of the economy based on services and consumer spending rather than manufacturing.

And its not because of the banks as Europe's banks are as levered as the US's, and its not due to US consumers being uniquely likely to borrow as many consumer borrowing stats are similar in Europe, and its not because Europe protects its home markets as most surveys show Europe has less trade protection than the US, and its not because the US is more advanced at offshoring as for many years Britain was the largest investor in China, Volkswagon is the number one foreign car manufacturer there, and Europe is consistently a larger foreign investor than the US.

The fact that there is such an anomalous trading relationship between China and the US points to something more fundamental than mere offshoring. There is a fundamental dysfunction in the operation of the US economy that has taken decades to arise and has now grown to the point of unsustainability. The reason for this dysfunction and the tremendous difference in the trading relationships between China and the US and China and the rest of the world can only be due to government action in the US as all other factors that could explain it are not different enough to account for the difference.

This has been a deliberate policy decision by the US that wasn't taken by Europe. The only driver for the US making such a different policy decision at the highest levels can be America's role as world policeman. The US government has deliberately trapped China into a dependent relationship with the US as the Chinese communist party is basing its legitimacy to govern on economic progress and can not afford a slowing of growth. Growth below 8% leads to a rise in unemployment and the old saying about China is that its only ever two missed meals from chaos.

What the next stage will be and what the US strategic thinkers are planning for the end game is a matter of some speculation, but it wouldn't be beyond the bounds of possibility that their plan is to destroy the communist party of China through repudiation of debts and a sharp economic downturn that the US can manage to hold civil society together through and the Communist Party will be ousted from power to be replaced by a government more to the US security and defence apparatus' choosing.

Economic warfare as practised against the Soviet Union on a more sophisticated level against the last potential rival to the US's ability to secure the natural resources it needs to remain the number one power on earth

Are you familiar with the Peter Garber view that this relations ship is one of cross-collateralization. US firms set up factories in China by trading $ for RMB and then investing in a facility. Those $, along with the trade profits earned at that facility, make their way into US Treasuries. Because of the trade defecit, capital flows to the US but the net returns are likely higher for US Capital (the return on a chinese factory for Apple is likely a lot higher than a 10X larger investment in US Treasuries). In this situation China is unlikely to ever pull an Allende and nationalize US private investments because they will then likely not get paid on their $Trillions worth of US Treasuries. American capital and consumers and Chinese exporters win...until the adjustment is neccessary. Symbiotic.

2 schools of thought:
1. China needs US to buy stuff to keep their party going
2. China doesn't
Seems like the US helped them get to where they are and now that USD is losing value they "covertly exchange USD for material goods" (commodities/a Navy).

People mention civil unrest in both countries should economies continue to deteriorate, yet with all the irrefutable and publicly available evidence of "fraudulent misrepresentation rising to treason" in this country the most civil unrest is people yelling at town hall meetings over what boils down to the potential for Medicare to get altered? We have a loooooong way to go for flat screen watching, suv driving, NASCAR (no offense) fans to actually do something. Besides look what happened when 55% (55% of Americans haven't agreed on anything, ever) of citizens polled opposed the bailout, they did it anyway. I also don't think that the result of Tienanmen is far enough out of Chinese people's minds to make them want to be the first to step in front of a tank. 13% of the Chinese population has internet access, but do you think any of them are using guugle translator to read zerohedge.com?
CAPTCHA!
bolweevil

Really the US consumer needs to stop using credit to make discretionary purchases that aren't needed for survival. Banks charge excessive interest and fees to consumers. I think the long term trend for the US consumer is changing to a higher savings rate. China is basically a centrally planned economy that needs to sustain high growth rates to stave off rebellion. I would like to see China's currency float free or else goods from the US and Europe won't ever be competively priced there.

Only thing is that China uses US securities that it purchases to purchase foreign commodities. In that way, it supports the US consumer but minimizes it's financial loss at the point of the US economic collapse. This is an important point that the article misses.

There is a lot of ink (keystrokes?) these days quoting Sun Tzu and about how China has this master plan and will take over the world. To my thinking, China is about 50 years late to the party. They are trying to industrialize on a massive scale in a post-industrial, peak-oil world. What they are going to be left with in the very near future is a lot of factory capacity for building things nobody wants, an environmental landscape ravaged by pollution, and 1.33 billion mouths to feed. Good luck with that.

Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard
Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.

I want to include a few paragraphs from a most important article by the brilliant Niall Ferguson, author of "The Ascent of Money, A Financial History of the world." Ferguson's article is about the coming "divorce" between the US and China. I believe the future of the world will revolve around the relationship of US and China. The Ferguson article appeared in Newsweek magazine (Aug. 21) and is entitled, "Chimerica Is Headed For Divorce." And I quote --

"Let's look at the numbers. China's holding of US Treasuries rose to $801.5 billion in May, an increase of 5% from the $763.5 billion in April. Call it $40 billion a month. And let's imagine the Chinese do that every month through this fiscal year. That would be a credit line to the US government of $480 billion.

Given that the total US deficit is forecast to be about $2 trillion, that means the Chinese may finance less than a quarter of total Federal-government borrowing -- whereas a few years ago they were financing 8/27/2009 virtually the whole deficit.

"The trouble is that the Chinese clearly feel they have enough US government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy, plus the
Federal Reserve's policy of quantitative easing (in laymen's terms, printing money) are going to cause one of two things to happen: the price of US bonds could fall and/or the purchasing power of the dollar could fall. Either way, the Chinese lose.

Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the US has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the
dollar. Then their economy tanked.

"What is China's alternative if it seeks a divorce from America? Call it the empire option.
Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (according to Goldman Sachs, China's GDP could equal
that of the US by 2027) to buy them global power in their own right. In some ways, they've already begun doing this. Their naval strategy clearly implies a challenge to US
hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial too. And now the official line from Prime Minister
Wen Jiaobao is to hasten the implementation of our 'going out' strategy and combine the utilization of foreign-exchange reserves with the 'going out' of our enterprises. That sounds like a Chinese campaign to buy foreign assets -- exchanging dodgy dollars for copper mines."

Russell Comment -- I believe the above is a brilliant look at our international future. No nation (the US) can be both the world's leader and world's biggest debtor. In his fight to thwart the bear market, Bernanke is sowing the seeds for the future demise of the United
States. The law of unintended consequences is about to become operative.

A huge problem ahead is this -- will the dollar decline slowly, as it has been doing, or will the dollar crash, setting off a world crisis?

Prediction -- Where ever you are now will be your best situation for years to come. The trick ahead will be to hold on to what you have. I've been warning that a "hard rain is a'coming." So far, we've only experienced a drizzle.

"Where ever you are now will be your best situation for years to come. The trick ahead will be to hold on to what you have."

I disagree. I believe that this crisis is the biggest wealth transfer opportunity in history, but only for those who really know what's happening. You have to be be nimble and willing to challenge even your dearest held beliefs.

"he key driver of all these three really has to do with consumption, which is not only what drives the US economy (70%+) but has been the driver for global growth over the past several decades."

The key driver of all this has been the US$ printing presses, not consumption. The consumption you refer to is a result of the paper dollar being accepted as money by other countries (esp. China - soon to come to an end). There is nothing unique about the US consumer consuming. If the world accepted the paper tickets I printed as "money", sure, no problem, I'd give you a 100% consumption oriented "economy" with sky as the limit for GDP "growth" since all I need to do is to print it. The US$ is the biggest illusion/bubble in the history of mankind and when it pops - oh boy - we'd all better be prepared.

"So the conclusion is that it always has and always will be about the US consumer."

No. It is about the USD and how long it is accepted as a reserve currency/money.

Exactly. See the Russell comment from Niall Ferguson above. I think that is right on. The Chinese know we screwed the Japanse in the early 90s (then Yen appreciated from 160 to 80), and there is no way they want that to happen to them.

Which is exactly what you say - the Japanese continued to accept dollars.

What happens if the Chinese (or Japanese, whose new govt is not going to accept the raping of their people any longer) start demanding debt paid in their own currency? We are fucked.

And let's not forget the Russians. What happens if one day they require payment for their oil in Euros? Or gold?

"We're not manufacturing" is the silliest argument out there. Intel is manufacturing. So is CAT, DE, DOW, DuPont, Apple, Dell, Boeing, etc. The fact is, as an economy grows wealthier there is only so much that needs to be "manufactured." We're done paying for the "stuff" we need sometime in The Spring- that includes food, clothing, BASIC health, auto, gas, even basic gadgets and services like telephone, cable, etc. After that we need to pay for shelter so as the "stuff" gets cheaper more of our incremental income goes to the purchase or construction of shelter. Then with what's left you pay for healthcare, services, brands (e.g., buy more expensive clothing/car for more than the utility of it), entertainment, etc. Finally you save and invest. We have not been doing enough of the latter (real savings and real investment into real wealth-generating businesses). However those businesses are not steel or autos they are likely biotech, med-devices, internet/IT, and green tech.

I think much outside capital has funded China's economy to extract profit from their cheap labor source and low environmental damage costs. The signs are it's water and air problems. As always the capital will flee to better opportunities elsewhere leaving China in shambles.

Some questions: Whatever our current a/c deficit is with China, they will hold it in new treasuries (shorter duration, no doubt) beyond that will they buy net new treasury debt needed to fund the `$2T US fiscal deficit?And what about the refunding of Treasury debt that is already o/s and coming due?Will they reinvest those dollars just to pacify us and stay even?Does anyone have data on this?And where would China get the funds to buy the $2T of new Treasury debt required to fund our fiscal deficits?They don’t have it and they won’t borrow money to buy them…so who buys the $2T of debt to fund fiscal deficit (never mind the $Bns if other nonChinese held o/s Tdebt coming due)?Fed buys some with printed money and makes BAC, C, JPM buy some and other banks who they can force do same…….are there enough willing and able buyers to fund this debt issuance without the Fed QE which is has only $30B left and is scheduled to end in Sept/Oct….ok, so Fed buys MBS and sellers buy the Tdebt for a while.Then what?Is the fiscal negative c/f gonna end?How?They keep creating new ways of spending money, tax revs keep going down…..unemployment keeps going higher and will continue….the US economy is dropping down to what it can be based on real earnings and no phony refi stimulus…no?So, is there a point where the Fed printing becomes obvious to all and the dollar implodes?Or, does the USGovt pass some huge tax to meet neg c/f (but what about neg impact from that on economy, so is that possible)?Is this US negative c/f situation not inevitably heading for a very ugly collision with reality regardless of what China does?Will the US politicians confiscate private pension assets?Why not, if they can?What if they can’t?

The argument that the US is holding the loaded gun to the temple of China completely depends on your point-of-view. The longer this symbiotic stalemate goes on the more it favours China, not the US. The gun has a long lifespan, but what about the hand holding it? Over time many things can happen: arthritis, sleep, and corrosion are just some of them. Ask yourself which is the more patient nation? Which nation could best withstand and recover from a collapse? The moral high ground in this tango rests with the hostage.

Stupid American keep buy junk fro China. Make many dollar. Hurry up and buy more we hab plenty mo for u. Special twice cook pork, we twice cook pork you eat. Happy family. You too stupid we win all yo money and you no hab any mo. Fuk up cituatin

Until China can kick the US Navy out of the Asian seas and gain control over it's owns shipping lane, it will be beholden to the US. The threat of big guns and cutoff of oil supplies have keep Japan in line since WWII and the same tactics will work with China.

The United States maintains on principle that waters beyond 12 miles offshore are open to all shipping, while China holds that the U.S. should not trespass within its 200-mile exclusive economic zone."

china will gradually ween their dependence and will slowly recycle UST toilet paper into commodities which will eventually lead to the creation of the only asset backed currency...we all know they are doing this now..they will continue to do so at a rate that keeps the status quo until the time is right to jump ship....the chinese are smarter and far more patient....one of the few articles written here that is incorrect...the assumption that the us is the only game in town and how that will affect this situation going forward is ludicrous and blind....